March 23 (Bloomberg) -- Sales of previously owned homes in the U.S. unexpectedly increased in February as record foreclosures pushed down prices and lured first-time buyers into the market.

Purchases rose 5.1 percent to an annual rate of 4.72 million from 4.49 million in January, the National Association of Realtors said today in Washington. The median price slumped 15.5 percent from a year ago, the second-biggest drop on record, and distressed properties accounted for 45 percent of all sales.

Stocks, already up after the Obama administration unveiled details of a plan to buy up to $1 trillion in troubled assets, extended the rally after the report. The president’s proposal, combined with last week’s Federal Reserve initiative to commit as much as $1.1 trillion more to unclog credit markets, is raising speculation the global economic slump may soon ease.

The plans “will certainly help, but will take time,” said Guy LeBas, chief economist at Janney Montgomery Scott LLC in Philadelphia, who had forecast an increase in sales. “We’re reaching a point where extreme sales declines will not happen, but we haven’t seen stability yet. There’s a long ways to go.”

The Standard & Poor’s 500 Index climbed 7.1 percent to close at 822.92. The S&P homebuilder composite index jumped 15 percent.

Year-on-Year Sales

Economists forecast resales would fall to a 4.45 million annual rate, according to the median of 65 projections in a Bloomberg News survey. Estimates ranged from 4.26 million to 4.75 million. Sales were down 4.6 percent compared with a year earlier.

First-time buyers accounted for about half of all sales last month, led by growing demand for lower-priced properties, said the realtors group’s chief economist Lawrence Yun. That’s contributing to the drop in values, he said.

The median price of an existing home decreased to $165,400 from $195,800 in February a year earlier, the group said.

Lower prices have drummed up enough demand in some of the most distressed areas of the country to allow values to stabilize. In California, median listing prices rose last month for the first time in three years, Yun said.

“Part of the market-clearing process is that distressed properties must be sold, so the fact that this is occurring is good,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm, said in a note to clients. “Still, it certainly depresses prices, and there are plenty more foreclosed -- or soon to be foreclosed -- homes in the pipeline.” He said values will therefore keep falling.

Flooded Market

The number of unsold homes on the market at the end of February represented 9.7 months’ worth at the current sales pace, the same as in January. The group has said a five to six months supply is usually consistent with a balanced market.

Resales of single-family homes increased 4.4 percent to an annual rate of 4.23 million. Sales of condos and co-ops climbed 11.4 percent to a 490,000 rate.

All four regions showed an increase in sales last month, led by a 15.6 percent gain in the Northeast.

Home sales have been falling since 2005 and prices peaked in 2006. The S&P/Case-Shiller home-price index of 20 metropolitan cities was down 18.5 percent in December from a year earlier, a record decline, the group said last month.

The drop in prices and declining mortgage rates have made buying a home more attractive. The realtor group’s affordability index reached a record high in January.

Government Action

Fed policy makers last week announced the central bank will buy as much as $300 billion in long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion. The central bank had already committed to buying $600 billion of mortgage-backed securities and bonds sold by government- sponsored housing agencies.

The Obama administration plans to use up to $100 billion of the $700 billion in bailout money to spur a public-private effort to purchase illiquid securities and loans that caused credit to dry up. Officials have also pledged to spend $275 billion to help keep as many as 9 million Americans in their homes and stem the rise of foreclosures. The program includes a tax break of as much as $8,000 for first-time homebuyers that wouldn’t require repayment.

Buyer traffic was up 5 percent last month, said Charles McMillan, NAR’s president and an agent in the Dallas-Fort Worth area. “It appears most of the increase in buyer traffic occurred in the latter part of the month after the $8,000 first- time buyer tax credit was put in place,” he said in a statement. “We expect to see sales picking up” around the middle of the year, he said.

Distressed sales are hurting builders. Toll Brothers Inc., the largest U.S. builder of luxury homes, this month reported its sixth consecutive quarterly loss. Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, had a 10th straight quarterly loss.

“We expect demand for all homes, both new and existing, to remain far below normalized levels,” Chief Executive Officer Ara Hovnanian said in a March 10 statement.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: March 23, 2009 16:15 EDT